In Spain, the law (the Restatement of the Spanish Companies’ Act approved by Royal Legislative Decree 1/2010, as of July 1st, and amended by, among others, Laws 1/2012, 14/2013, 5/2015 and 11/2018), provides three types of companies that, in contrast to what succeeds with partnerships, rely on capital subscribed and paid by the shareholders:
All three of these issue capital units, to be subscribed and paid by the shareholders, but the regime of those units and the rights and liabilities of those who own them are different in each of those companies. In addition to these three main types, the Restatement of the Companies Act (SCA) creates a fourth type, the so-called Sociedad Nueva Empresa, which is a special type of Sociedad Limitada provided for certain small ventures promoted by physical persons, and develops the regime of the European Company, as provided for in EC Regulation 2157/2001, of 8 October 2001, on the Statute for a European company (SE). The most important of these four types of Spanish companies are the Sociedad Limitada and Sociedad Anómina, as more than 95% of existing Spanish companies are organised in accordance with one of these two types. Although, in both of these, liability of the shareholders for debts of the company is limited to the amount of share capital subscribed by them, there exist important differences between them in terms of minimum share capital required, rights of the capital-holders, restrictions to the transmission of capital units, listing of shares in stock exchanges and rules governing general meetings and management, among others.
Whereas the Sociedad Limitada, as the German Gesellschaft mit beschränkter Haftung, is a type of company devised for small- to mid-size ventures, with a small number of capital-holders whose capital units cannot be traded in a stock exchange and which are subject to several transmission restrictions, the Sociedad Anónima (SA) provides for larger ventures and a higher number of shareholders and allows for no transmission restrictions. Although the articles of association of an SA can set forth some transmission restrictions, these are in any case fewer than those allowed by the CA for a Sociedad Limitada. Actually, the SA was devised with an idea of promoting the tradeability of the share capital in mind, which is also behind the business corporation or joint-stock company provided in other jurisdictions, its regime being similar to that of the Aktiengesellschaft, in German-speaking countries, and the Societé Anonyme, in countries where French is spoken. As for the Sociedad Comanditaria por Acciones, its regime is similar to that of the Sociedad Anónima, except insofar as at least one of the shareholders in the former is fully liable for the company’s debts.
Of the four main types of companies provided in the SCA, only the Sociedad Anónima (SA) and the Sociedad Comanditaria por Acciones have their capital divided in shares represented by titles that can be listed in an official stock exchange (securities). This chapter will concentrate on the regime of companies organised as SAs.
Only companies organised as an SA or a Sociedad Comanditaria por Acciones can be public, as only these companies can issue shares (Article 92 (1) of the SCA) and only share-issuing companies can have their share capital listed on an official stock exchange. Therefore, with the exception of those two types of companies, which can be either public (the so-called listed companies, named by the SCA as “sociedades cotizadas”) or private, the remaining types – the Sociedad Limitada and the Sociedad Nueva Empresa - are necessarily private.
In accordance with the rules set forth in the Treaty on the Functioning of the European Union (TFEU) (Article 63), Spain imposes no restrictions that prevent any physical person, company or any other type of entities, either Spanish or foreign, including foreign public bodies, from being shareholders of an SA.
Nonetheless, as permitted by Article 65 of the TFEU, Spain has approved Royal Decree 664/1999, which establishes certain rules applicable to investments made by foreigners, ie, physical persons, companies and other bodies not resident or established in Spain, in Spanish companies and other assets, the most important of which is that of notifying the Spanish authorities of any investments and divestments made in Spain by such persons. Although the rule is that the notification is due after the transaction has been carried out (Article 4.2 (b)), if the transaction is performed by a person or company established in a territory qualified by the Spanish legislation as a tax haven, the notification must be performed ex ante (Article 4.2 (a) of Royal Decree 664/1999).
In addition, and as allowed by Article 65 of the TFEU, Royal Decree 664/1999 excludes investments in the area of defence (manufacturing and commerce of guns, munitions, explosives and war equipment) from the EU regime of free movement of capital. Pursuant to its Article 11, investments made by foreigners in this area must be authorised by the Spanish government, following a request made by the prospective investor before the Ministry of Defence and upon proposal of the corresponding Minister. Nevertheless, in the case of investments in public companies operating in the defence sector, the authorisation is necessary only if the shares to be acquired represent more than 5% of the issued share capital or, where they do not, if they allow the prospective investor to obtain a seat on the board of directors.
Recently, the Government has passed Royal Decree 8/2020, then amended by Royal Decree 11/2020, which added Article 7 bis to Law 19/2003, on capital movements and foreign economic transactions. Designed to address the effects of the COVID-19 outbreak and as allowed by Regulation (EU) 2019/542 of the European Parliament and of the Council, establishing a framework for the screening of foreign direct investments into the Union, Article 7 bis reinstated certain restrictions to investments made by investors from outside the EU or any of the member states of the European Free Trade Association (EFTA), or whose beneficiary owner is established outside the EU or the EFTA.
Pursuant to Article 7 bis of Law 19/2003, among others, investments made by those investors in certain sectors (critical infrastructure, critical technologies, supply of critical inputs, sectors with access to critical information and the media sector), whenever the stakes to be acquired amount to more than 10% of the share capital of the targeted Spanish company, are now subject to the authorisation provided in Article 6 of this piece of legislation for transactions carried out under special circumstances, as set out in its Articles 4 and 5.
The SCA devises a basic distinction between ordinary and preferred shares (Article 98). Preferred shares bear the same rights as those of the ordinaries, with the exceptions provided in Articles 98 to 101 and 102 (2) and Article 102 (1) of the SCA.
Although Article 94 (1) of the SCA sets the rule whereby all shares give the same rights to all shareholders, this rule does not prevent the articles of association from establishing different types of shares. Where the articles of association provide more than one type of share, this rule would apply only within each of the types of shares provided.
The SCA does not specify which types of shares can be devised in the articles of association. Therefore, the only limit to the assignment of rights to a certain type of share would be the breach of a mandatory legal provision (eg, no type of share can give shareholders the right to perceive an interest, as this would breach the rule set out in Article 96 (1) of the SCA).
One type of preferred shares specifically provided by the SCA is shares with no voting rights (Article 99 of the SCA), which are mandatorily entitled to a minimum annual dividend, fixed or variable, as provided in the company’s articles of association (Article 99 (1) of the SCA). In the case of losses or profits insufficient to reach the minimum dividend, the unpaid part of this should be paid in the following five years. For the period during which this dividend remains unpaid, preferred shares will carry voting rights as if they were ordinary, while keeping their economic advantages (Article 99 (2) and (3) of the SCA).
Any amendments to the articles of association that in any way affect the rights borne by no-voting shares need to be approved by the shareholders controlling the majority of this type of share (Article 103 of the SCA).
In the case of public companies, the SCA allows them to issue callable shares, in an amount of up to 25% of the issued share capital, which can be redeemed either by the issuing company, the corresponding shareholders or by both of them (Article 500 (1) of the SCA). These shares must be paid in full at the time of their issuance (Article 500 (3) of the SCA).
Redemption of callable shares must be covered by non-distributed profits, by reserves or with newly thereto-issued share capital (Article 501 (1) of the SCA). In the event that none of these is available, redemption would be possible only with a share-capital reduction with refund of their value, as provided in Article 329 of the SCA (Article 501 (3) of the SCA).
The primary source of law relevant to the SA, and notably to the rights of the shareholders of any company of this type, is the Restatement of the Spanish Companies’ Act, as approved by Royal Legislative Decree 1/2010 of July 1st (SCA).
The SAs which are public companies are subject to Articles 495 and following of the SCA, which establish specific rules for those companies (on shares, the shareholders’ meeting, management, shareholders’ agreements, disclosure of information, etc) that modify the regime applicable to non-public SAs. This last regime is applicable to public companies only to the extent that it is not varied by the aforementioned specific rules.
For public companies, Royal Decree 1362/2007 of October 19th, on transparency requirements in relation to information about issuers whose securities are admitted to trading on an organised exchange or other regulated market in the European Union, is also an important source of applicable law, insofar as it sets forth important rules on the disclosure of financial information and the shareholders that have achieved control over certain percentages of share capital.
Public companies and any companies that issue securities other than shares (bonds, short-term debt securities, derivatives, etc) are also subject to the Restatement of the Securities Market Act, approved by Royal Legislative Decree 4/2015, of October 23rd, and amended by, among others, Royal Decree Laws 21/2017, 14/2018, 19/2018 and 21/2018.
Moreover, articles of association can be an important source of law for a company, insofar as the SCA leaves ground for the articles of association to devise other rules, provided these do not breach mandatory legal provisions. This also applies to the regulations of the shareholders’ meeting and of the board of directors approved by the corresponding organs.
In addition, public companies are subject to the regulations issued by the Comisión Nacional del Mercado de Valores, the Spanish Securities Markets Commission (CNMV) and, at the same time, by the soft law issued by that body (codes of good practice, good governance codes, etc).
Pursuant to Article 93 of the SCA, shareholders' rights are essentially the following four:
In addition to those rights and unless otherwise provided in the articles of association of the company, Article 161 of the SCA gives the general meeting of shareholders a right to:
Moreover, Article 27 (1) of the SCA allows for the articles of association of an SA to provide certain economic rights in favour of the founding shareholders, whose value, whatever its nature, cannot exceed 10% of the annual profits available to all shareholders, for a period of up to ten years. The same rule applies to the promoters of an SA, if this has been set up under the regime of public subscription of shares provided in Articles 41-55 of the SCA.
Shareholders' rights, ie, rights that can be enforced before the company, can be varied only by way of an amendment to the company’s constitutional documents. Any agreement between shareholders regarding the modification of such rights that does not entail an amendment of the constitutional documents could never be enforced before the company. In any case, the enforceability of the amendment would depend on it being formalised in a public deed made before a public notary, which would then need to be registered with the Companies’ Registry. Only thereafter would the amendment be enforceable against the company.
Shareholders' rights granted by the SCA are at a minimum level, which can be amplified by the articles of association, although they cannot be reduced by them unless the waiver of those rights is expressly provided in a piece of legislation. Therefore, articles of association can establish rights not provided by the law, provided that they do not breach any mandatory provision of the law. The articles of association can provide rights pertaining to a category of shares but not to a particular shareholder or shareholders, except in the case of the founding shareholders of an SA, as provided in Article 27 of the SCA.
Shareholders' agreements are agreements and as such are enforceable up to the point where they breach mandatory legislation. Shareholders’ agreements are made between two or more shareholders of a certain (issuing) company, which is not a party to the agreements, so will not be bound by them.
Shareholders’ agreements rule on how certain shareholders of a company will perform their rights, notably their voting rights in the general meeting (eg, will vote in certain terms on a certain matter during a certain period of time) and/or establish restrictions to the sale and purchase of shares owned by any of the parties. If a party breaches its obligations under the shareholders’ agreement, eg, by voting B instead of voting A, as was ruled in a shareholders’ agreement, this will not be a ground to invalidate the vote, as the company is not a party to the agreement. Nonetheless, any such breach of an obligation will give the other party(ies) to the shareholders’ agreement the right to claim damages from the breaching party.
For public companies, Articles 530 and following of the SCA establish certain rules regarding shareholders’ agreements entered into by shareholders of companies that rule on voting in the general meeting and/or establish restrictions to the sale and purchase of shares.
The basic rule provided in the provisions of the SCA states that any of those agreements is subject to immediate notification to the company and the CNMV (Article 531).
For private companies, although shareholders’ agreements are not subject to any sort of disclosure, Royal Decree 171/2007 anticipates the possibility of disclosure, either on the company’s website or by means of its registration with the Companies’ Registry, of shareholders’ agreements entered into by relatives who have a common interest in the company, the so-called protocolos familiares. The decision to disclose such shareholders’ agreements is in the hands of the directors, who must evaluate whether the disclosure is in the interest of the company, although the shareholders who are affected will have to authorise the disclosure of their data that is included in the agreement.
In Spain, at least since the 1980s, it has been quite common for shareholders to enter into shareholders’ agreements. Nonetheless, the number and complexity of these agreements has increased substantially in the last few decades, along with the development of the Spanish economy (companies with higher share capital, which tend to demand more providers of equity, an increase in the number of professional providers of capital, etc) and of the companies’ legal framework (more complex corporate structures, new rules aimed at improving corporate governance, etc).
The SCA provides several types of rights the exercise of which by shareholders depends on the percentage of shares they control. Among these rights, the following are worth mentioning:
Article 197 of the SCA grants shareholders the right to request the directors to provide information regarding any matters included in the agenda of a shareholders’ meeting. This information must be requested at least eight days before the date of the meeting and the directors are requested to answer in writing before the meeting. The same right can be also exercised in the general meeting, in which case the directors will have seven days following the day of the meeting to answer in writing.
The directors can deny the information requested by the shareholders when they consider it unnecessary for the protection of the rights of the requesting shareholder, or when there are objective reasons to think that such information, if it were provided to the requesting shareholder, would be used with a view contrary to the interest of the company or its disclosure would damage the interest of the company or of any of its affiliates (Article 197 (3)), except if the request is filed by shareholders who control no less than 25% of the share capital, as the disclosure of the information would then be always mandatory (Article 197 (4)). The articles of association can lower this threshold to a lower percentage, but not to a percentage lower than five (Article 197 (4)).
For listed companies, Article 520 of the SCA lowers to five the number of days in advance provided in Article 197 of the SCA for the request of information regarding any matters included in the agenda of a shareholders’ meeting. Furthermore, it also gives the shareholders the right to request explanations regarding any information disclosed by the company to the CNMV since the previous shareholders’ meeting and in relation to the auditing report.
All requests of information filed by the shareholders, as well as the answers provided by the directors, are to be published on the company’s official website (Article 520 (2) of the SCA), the existence of which is mandatory for listed companies (Article 11 bis (1) of the SCA).
In all other points and issues, the regime set forth in Article 197 of the SCA regarding the right of the shareholders to obtain information on the company applies in full to listed companies.
Article 160 of the SCA provides for the issues that require the approval of shareholders in a shareholders’ meeting, including the approval of the accounts, the appointment of directors, the amendment of the articles of association, the performance of certain transactions with assets deemed essential to the company and the merger, winding-up and relocation to a different country.
In addition to those specifically provided for by Article 160 of the SCA, any other piece of legislation, including any other SCA provisions, and the company’s articles of association, can subject a certain issue to the approval of the general meeting (eg, the sale of assets for which the approval of the general meeting would not be legally mandatory, the carrying-out of certain business, the agreement not to engage in certain business activities, the issuance of bonds, etc).
For public companies, in addition to those provided in Article 160 of the SCA, Article 511 bis of that legislation rules that the shareholders’ meeting also has the following powers:
Furthermore, Article 161 of the SCA provides that, unless otherwise ruled by the articles of association, the shareholders’ meeting also has the right to give instructions to the directors or to rule that certain management issues cannot be handled by the directors without its approval in advance.
The directors are the officers in charge of calling meetings of shareholders (Article 166 of the SCA), whenever they consider it convenient or mandatory in accordance with the law or the articles of association (Article 167 of the SCA). Nonetheless, shareholders also have a say on this, as, pursuant to Article 168 of the SCA, the directors must call a meeting of shareholders whenever one or more shareholders representing no less than 5% of the share capital request them to call a shareholders' meeting to rule on a certain issue. This percentage is lowered to three in the case of public companies (Article 495 (1) a) of the SCA).
Directors are requested to call a shareholders’ meeting within two months following the date when minority shareholders have requested them to do so under Article 168 of the SCA (Article 168 (2) of the SCA). If directors fail to comply with this obligation, shareholders can request that either the Secretary of the Court or the Companies’ Registry call a shareholders’ meeting.
The call needs to be announced on the company’s web page, if it exists and is in good standing in accordance with the rules set forth in Article 11 bis of the SCA; if it is not, the call should be published in the Companies’ Registry Official Gazette and in a widely circulated newspaper in the province where the company is registered, unless otherwise provided for in the articles of association (Article 173 of the SCA).
For companies organised as SAs, Article 172 of the SCA allows shareholders controlling no less than 5% of the share capital of the company to request, in the first five days following publication of the call, the publication of an addendum to the call, with additional points to be discussed and voted in the shareholders’ meeting. Failure by the directors to proceed as requested no later than 15 days before the date set for the shareholders’ meeting would make this void.
Pursuant to Article 174 of the SCA, the notice of the call for a shareholders’ meeting must include at least:
In the case of public companies, the call of a shareholders’ meeting must always be published in the Companies’ Registry Official Gazette or in a widely circulated national newspaper, on the webpage of the Spanish Securities Exchange Commission and on that of the company (Article 516 of the SCA). The notice of the call for a shareholders' meeting must include more information than the call required for companies in general in Article 174 of the SCA (Article 517 of the SCA) and additional information must be disclosed on the company’s web page from the day of the announcement of the call (Article 518 of the SCA).
In terms of the quorum required for the shareholders’ meeting, Article 193 of the SCA rules that, in the first call, the meeting is deemed to be in good standing if no less than 25% of the share capital with voting is present or represented at the meeting, although the articles of association can establish a higher percentage. In the second call, required if the attendance from the first call is lower than the requested quorum, no minimum attendance would be required unless otherwise ruled in the articles of association, which could request a lower minimum percentage of attendance for a second call, though in all cases lower than the one applicable in the first call (25% or the higher percentage thereto set forth in the articles of association).
Nevertheless, in the case of the shareholders’ meeting called to discuss and vote upon any matters provided in Article 194 of the SCA (share-capital increase or reduction and any other amendments to the articles of association, issuance of bonds, renunciation of the right of shareholders to subscribe to a share-capital increase, merger of the company with another, etc) in the first call, the meeting is deemed to be in good standing if no less than 50% of the share capital with voting is present or represented at the meeting. In the second call, required if attendance from the first call is lower than the requested quorum, a minimum of 20% would be required. In both cases, the articles of association may request higher percentages of quorum.
Regarding voting requirements at shareholders’ meetings, Article 201 (1) of the SCA provides that for a resolution to be deemed approved by the shareholders’ meeting the requirement is a simple majority of favourable votes cast by the shareholders present or represented at the meeting. However, to rule on any of the matters stated in Article 194 of the SCA, if the share capital present or represented at the meeting is no more than 50%, the approval of the resolution would require an absolute majority of favourable votes; if the share capital present or represented at the meeting is less than 50% in the terms provided in the previously mentioned Article 194 (2) of the SCA, the approval of a resolution would require a qualified majority of favourable votes of no less than two thirds of the present or represented share capital at the meeting (Article 201 (2) of the SCA).
Regarding the proposal of resolutions, as previously mentioned, in the case of companies organised as SAs, Article 172 of the SCA allows shareholders controlling no less than 5% of the share capital of the company to request, in the first five days following the publication of the call, the publication of an addendum to the call, with additional points to be discussed and voted upon in the shareholders’ meeting. Failure by the directors to proceed as requested no later than 15 days before the date set for the shareholders’ meeting would make this void.
The SCA does not grant shareholders any rights to participate in the management of a company; this right is clearly vested in the directors (Article 209). Nonetheless, as already stated, it provides that, unless differently ruled by the articles of association, the shareholders’ meeting has the power to give instructions to the directors or to rule that certain management issues be subject to its approval (Article 161). Although this power is not to manage the company, it clearly conditions how and to what extent management powers are to be performed by the directors.
As for participation in the company’s board of directors, although a shareholder does not have a right per se to sit on the company’s board of directors, she or he clearly has the right to vote on the appointment of directors in the general meeting. Therefore, depending on her or his voting power, each shareholder can in some way participate in the decision on who shall be the company’s directors.
It is thus clear that, although shareholders do not actually participate in the management of companies, they clearly have powers to condition it, although those powers are limited by the strength of the voting power of each shareholder.
Shareholders have the right to appoint the directors in the constitutional deed (Article 22 of the SCA). In the case of SAs, the appointment will be for the term set forth in the articles of association, which in no case can be more than six, in the case of non-listed companies, and four years (Articles 221 (2) of the SCA), in the case of listed companies (Article 529 (1) undecies of the SCA), although without any renewal limits (Article 221 (2) of the SCA).
For any term after the initial one, the decision to appoint new directors is in the hands of the shareholders’ meeting (Article 160 b) of the SCA), without detriment to the power of the board of directors to co-opt new directors to replace those who renounced their position or died before the end of the term for which they had been appointed (Article 244 of the SCA). Furthermore, any such appointment by the board of directors must be ratified by the shareholders (Article 244 of the SCA). Where the shareholders’ meeting ratifies the co-option of a director, the shareholders who voted against the ratification can challenge this decision on the ground of it being illegal, under the general rules on challenging of corporate decisions set forth in Articles 204-207 of the SCA.
Nonetheless, in the case of listed companies, the appointment of directors by the shareholders’ meeting depends on a proposal being made by the committee for appointments and remuneration, in the case of independent directors, or by the board itself, in the case of non-independent directors (Article 529 decies (4) of the SCA).
Removal of directors is always a power of the shareholders’ meeting, even if any such removal has not been included in the agenda of the meeting (Articles 160 b) and 223 (1) of the SCA). In the case of companies organised as an SA, Article 224 of the SCA rules that any shareholder has the right to request the removal of a director if, after her or his appointment, a situation has arisen that makes her or him ineligible to hold the position, or if she or he has an interest opposite to the company’s interest.
In addition, the approval, by the shareholders’ meeting, of the filing of a lawsuit for damages against a director has ipso facto the effect of removing that director from her or his position (Article 238 (3) of the SCA).
Decisions taken by the board of directors can be challenged by shareholders controlling no less than 1% of the share capital within 30 days from the date those shareholders become aware of the decision, provided that no more than one year has passed since the adoption of the challenged decision (Article 251 (1) of the SCA). The grounds for challenging these decisions are the same as those applicable to decisions of the shareholders’ meeting and any breach of the rules of the board of directors (Article 251 (2) of the SCA).
The appointment of the company’s auditors is a right of the shareholders, provided in Article 264 (1) of the SCA, which rules that it is up to the shareholders’ meeting to appoint the auditors before the end of the term which they will be auditing, for an initial period of no less than three and no more than nine years.
Auditors cannot be removed by the shareholders’ meeting except in the case of just cause thereto (Article 264 (3) of the SCA). Pursuant to Article 266 of the SCA, where a just cause exists, either (i) the directors of the company or (ii) any person entitled to request the appointment of auditors can request either the court or the Companies’ Registry with which the company is registered to remove the appointed auditors and appoint new ones.
In the case of companies deemed of general interest (banks, insurance companies and other companies, as set forth in Law 22/2015 of July 20th, on accounts auditing) and there exists just cause thereto, shareholders with no less than 5% of the voting rights or of the share capital are also entitled to request the removal of the auditors on the terms provided in the aforementioned Article 266 of the SCA.
In private companies, shareholders are never required to disclose their interests in the company. Nonetheless, the company is obliged to provide information to the authorities on who controls more than 5% of its equity, on tax grounds. In addition, sole-shareholder companies are requested to register the name of their shareholder with the Companies Registry, as well as any changes in the same or the loss of such status.
In the case of public companies, Article 497 (1) of the SCA allows them to request from Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. (IBERCLEAR), a central securities depository authorised under EU Regulation No 909/2014 to act as the depository of all securities traded in the Spanish stock exchanges, information on their own shareholders, including addresses and other data. This right is also attributed to shareholders controlling no less than 3% of the company’s share capital, for the purpose of allowing them to have contact with the remaining shareholders with a view to protecting their rights and promoting their interests in common.
Moreover, the aforementioned Royal Decree 1362/2007, on transparency requirements in relation to information about issuers whose securities are admitted to trading on an organised exchange or other regulated market in the European Union, imposes on shareholders who acquire or dispose of shares of a Spanish listed company, to which voting rights are attached, an obligation to notify the issuer and the CNMV of the proportion of voting rights of the issuer held by the shareholder as a result of the acquisition or disposal where that proportion reaches, exceeds or falls below the thresholds of 3%, 5%, 10%, 15%, 20%, 25% 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% and 90% (Article 23). This obligation also applies, among others, to any physical or legal person that, though not a shareholder, acquires or is entitled to perform voting rights corresponding to the shares, provided that the proportion of voting rights reaches, exceeds or falls below the stated thresholds and is a consequence of one or more of the acts set forth in Article 24 (1) of the same piece of legislation.
The aforementioned notification must include the following information:
The notification to the issuer and to the CNMV shall be effected no later than four trading days after the date on which the person subject to the obligation becomes or ought to become aware of the circumstances giving rise to the obligation to notify in accordance with the applicable rules under Article 35 (Royal Decree 1362/2007).
As a rule, shareholders have the right to grant security interests over their shares (Article 121 (1) of the SCA). Nonetheless, if the shares have been seized in court proceedings against the shareholder, the court will notify the company of this, for the purpose of allowing it to waive the sale of the shares in auction to a third party, if it has either produced an acquirer of the seized shares or acquired them for itself for a reasonable price fixed by an independent expert (Article 124 ex vi Article 125 of the SCA).
Unless otherwise provided for by the company’s articles of association – which can impose restrictions on the disposal of nominative shares, including the agreement of the issuing company - the disposal of shares is not subject to any requirements or restrictions (Article 123 of the SCA).
Agreements are a means to create requirements or restrictions on disposal of shares. However, if they do not lead to an amendment of the articles of association, those agreements would not bind the (issuing) company and, as such, their breach would not affect the validity of a disposal of shares made in breach of those agreements. Nonetheless, the breach of an agreement, eg, not to sell certain shares or not to sell them to a certain person or entity would allow the innocent party (the creditor of such an obligation) to claim damages for the breach of its right from the breaching party, under the general contract and contractual liability rules.
A company can be put into liquidation only if there exists a legal ground that ipso facto leads to it being wound up (Article 360 of the SCA) or if its winding-up has been ordered, either by the general meeting, on a legal ground thereto (Articles 363-364 of the SCA) or voluntarily (Article 368 of the SCA) or, if the company has been declared insolvent by the court that is hearing the corresponding bankruptcy/insolvency case and a restructuring plan could not be approved by its creditors (Article 361 of the SCA).
In the period during which the company is in liquidation, it keeps its legal personality until liquidation has come to an end (Articles 371 of the SCA and 413 of the Restatement of the Bankruptcy and Insolvency Act, recently approved by Royal Legislative Decree 1/2020).
Once a company has been declared insolvent and put into liquidation, the main right held by each shareholder is that of receiving the proportional part of the company’s remaining proceeds from the sale of the company’s assets, if any, after payment of all debts acknowledged in the proceedings. However, as a company put into liquidation in bankruptcy proceedings is not only bankrupt but also insolvent, the proceeds from the sale of its assets should not be enough to pay all credits acknowledged in the proceedings and, therefore, there should be no remaining proceeds available to the shareholders.
Shareholder activism as such is not provided for by any Spanish legal or regulatory provisions. However, if shareholder activism is interpreted to mean an active exercise by the shareholders of their rights to rule on the matters provided in Article 160 of the SCA, it is clear that this matter is governed by the law, notably by the provisions in the SCA that cover the rights of shareholders and their general meetings. In recent years, the number and contents of shareholders’ rights have been on the increase in Spain, with amendments to the SCA, on corporate governance matters, passed by Laws 3/2011 (which transposed the EC Directive 2007/36) and 31/2014.
With the approval of EU Directive 2017/828, amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, a reform of the SCA and of the aforementioned Royal Decree 1362/2007 on corporate governance matters should be expected soon, notably on the ground that more than a year has passed since the deadline for the transposition of this new directive (19 June 2019).
In accordance with the draft of the legislation that will transpose EU Directive 2017/828, disclosed by the Ministry of the Economy in May 2019, this reform, although in line with the reinforcement of shareholders' rights, would allow listed companies to adopt loyalty shares, something that could reduce the power of shareholders that have been so for less than two years, which is the most common scenario in the case of activist shareholders. Under this draft, the provision on loyalty shares allows the articles of association of listed companies to attribute more voting power to the shares owned for more than two years by the same person or entity, with a view to curbing short-termism in the management of listed companies, something usually associated with shareholder activism.
Shareholder activism has been on the rise in recent years, although it is still, by all accounts, less prevalent than in other jurisdictions such as the UK or the USA, notably on the ground that, in most of the Spanish listed companies, a small number of shareholders still tends to control the majority of the share capital, something that can reduce the margin of manoeuvre for any defying minority shareholders.
Nonetheless, this increase in shareholder activism is due both to the previously mentioned corporate governance changes in the legal environment, which have strengthened the powers of minority shareholders, and to the fact that, in recent years, the volume of share capital controlled by activist shareholders has grown substantially.
A prominent recent example of shareholder activism in Spain is that of LetterOne (a vehicle used by Mikhail Fridman, a Russian investor), which, with 29% of the share capital of DIA, a Spanish retail chain listed in Madrid’s Stock Exchange, in early 2019 launched a successful voluntary tender offer to acquire the remaining share capital of the company, notwithstanding having faced strong opposition from the board of directors and the then-controlling shareholders.
In order to build their stake in a company, activist shareholders usually buy shares in the market and/or acquire other financial instruments that award them indirect voting power in the companies. In addition, with a view to strengthening their voting power, they seek to convince other shareholders to align themselves with their views on the company at the time of voting in the shareholders’ meetings.
The typical agenda of an activist shareholder tends to be focused on the idea of increasing the value of the company and, as a consequence, increasing the value generated to the shareholders, either in terms of an increased share value and/or dividends distributed. With this in mind, activist shareholders typically produce a proposal of measures that, in their view, would increase the value of the company. Examples of these proposed measures, the approval of which is actively pursued in the shareholders’ meetings, are:
As in other countries, finance, services, retail, health, and technology are the industries where more shareholder activism has been seen in recent years. However, it has been seen in many other sectors, notably in matters related to the approval of the boards’ compensation.
Professional investors (hedge funds, etc) tend to be more active than others, notably on the ground of being accountable before their clients in terms of the returns generated by the invested monies.
In fact, in their position of managers of their clients’ money, professional investors are under pressure to generate returns and to generate them in very short periods of time. The need to generate returns in the short run is one reason, probably the main one, why hedge funds and other professional investors are usually very active at the time of exercising their rights as shareholders. Being active as shareholders is the tool used by professional investors to improve management of the participated companies, with a view to generating value to them as shareholders of such companies.
In Spain, the information disclosed by the courts on the cases ruled each year, although organised in accordance with the types of matters decided, does not include any data regarding the number of lawsuits filed by shareholders. Therefore, there is no information available regarding the number of activist demands upheld by the courts.
In the past, companies, and the shareholders in control of them, tended to react in a negative way to any approaches made by activist shareholders, which from the outset gave ground to the conflict with those shareholders to be solved in legal battles, in which they counted on articles of association with provisions drafted with the intention of limiting the voting power of certain shares. This limitation usually left the activist shareholders with less voting power than they would otherwise have had and caused them to end up with less than the required power for the approval of the measures they sought.
In recent times, however, the scenario has begun to change, and now companies tend to react, at least initially, in more friendly terms to the intentions of activist shareholders to change the company’s landscapes, aiming to avoid legal conflicts that, at the outset, no one can be sure of winning. This leads boards to be much more open to listening to what activist shareholders have to say on management issues, and, to a certain extent, to adapting management to their views.
In addition, considering these ideas, and backed by the controlling shareholders, boards are now much more oriented towards the generation of value to the shareholders than in the past. The more value is generated to the shareholders, the fewer the opportunities for activist shareholders to deploy any strategies aimed at increasing that value, as the “margin for improvement” is smaller than that which it could otherwise have been.
Nonetheless, tensions have not disappeared, notably on issues such as board control, where, with the increase of share capital controlled by activist shareholders, conflicts are certainly on the rise. In particular, companies with poor performance, whose share price is depressed and/or that do not pay dividends, are at risk of suffering pressure from activist shareholders.
All companies organised under the rules of the SCA have their own legal personality, which is completely distinct from that of its shareholders. A company acquires its own legal personality once it is registered with the Companies’ Registry (Article 33 of the SCA).
The SCA provides a right of shareholders to file a lawsuit against the company for any decisions adopted either by the directors or the shareholders’ meeting that are in breach of the law, the articles of association, the rules of the shareholders’ meeting, of any other of the company’s rules, or that somehow harm the interest of the company in favour of one or more shareholders or of any third parties (Article 204 (1)). In accordance with this provision, the interest of the company is deemed to be harmed by a corporate resolution in all cases where such a decision is adopted for the benefit of the majority shareholders, even if no actual damage to the company’s assets results.
The remedy provided with this lawsuit is the declaration by the courts that a certain decision adopted is illegal and, as such, void. The lawsuit can be filed by any shareholders, no matter how many shares they own and/or the percentage of share capital controlled by them.
The SCA provides that the company’s directors are liable before the company, the shareholders and the creditors for damages caused by any acts or omissions that breach:
The lawsuit for damages against directors is to be filed by the company, upon its approval by the shareholders’ meeting, at the request of any shareholder. The filing of the claim is deemed approved if the majority of the votes cast in the shareholders’ meeting approves it, as the articles of association may not request a higher majority for such an approval (Article 238 (1) of the SCA). As previously mentioned, this approval has ipso facto the effect of ending the appointment of the director against whom legal action has been approved by the shareholders’ meeting (Article 238 (3) of the SCA).
Pursuant to Article 239 (1) of the SCA, minority shareholders controlling a percentage of the share capital that allows them to request the call of a shareholders’ meeting under Article 168 of that piece of legislation, can file their claim, on behalf of the company (derivative action), when:
In cases in which the lawsuit against a director is based on the breach by these actions of her or his duty of loyalty before the company, the approval by the shareholders’ meeting is waived by the aforementioned Article 239 (1) of the SCA, in such a way that the minority shareholders can file the lawsuit from the day when the damaging breach of the director’s duty of loyalty has been committed, without the need to call a shareholders’ meeting thereto.
In addition to the lawsuits filed by the company against its directors, Article 241 of the SCA sets forth that the existence of those lawsuits does not exclude the right of a shareholder, under the general rules, to file, in her or his own name, a claim against a director whose actions have damaged her or his own rights and interests as a shareholder.
Any lawsuits against a director, filed either by the company or one of its shareholders, must be initiated within four years counted from the date when they could have been filed (Article 241 bis of the SCA).
Neither the SCA nor any other Spanish legislation provides specific remedies against other shareholders. This is understandable, if it is borne in mind that a shareholder per se cannot act in terms that bind the company and as such cannot harm the rights of any shareholder in relation to the company.
Nevertheless, under the general rules on civil liability, a shareholder can claim damages from another shareholder if she or he can provide evidence that the other shareholder acted in terms that somehow breached her or his shareholder rights and, in so doing, caused her or him damages.
This remedy is available to any shareholder, no matter how many shares or what percentage of share capital are controlled by that shareholder.
Auditors are liable before the company for damages caused in the performance of their auditing duties set forth in the SCA (Articles 268-270) and/or in Law 22/2015 of July 20th on the auditing of accounts.
Pursuant to Article 271 of the SCA, lawsuits filed against auditors by minority shareholders on behalf of the company are subject to the rules provided for lawsuits against directors (Articles 236-241 bis of the SCA). However, as the auditors do not have a duty of loyalty to the company for which they have audited accounts, the rule provided in Article 239 of the SCA, which allows shareholders to sue directors directly on behalf of the company for the breach of that duty, without the need to call a shareholders’ meeting thereto, would not apply to directors. Therefore, the filing of any claim against an auditor would always require a shareholders’ meeting to be called in advance.
The only derivative action provided by the SCA is the one set forth in its Article 239, which allows minority shareholders (controlling a percentage of the share capital that allows them to request the call of a shareholders’ meeting under Articles 179 (2) or, in the case of listed companies, 521 bis of the SCA) to file legal suits, on behalf of the company, for breaches of the duty of loyalty by any director, or to file any other legal suits against directors that, for whatever reason, were not filed by the company in spite of the request of those shareholders for it to be done.
The main factors usually considered by shareholders at the time of deciding whether to litigate to obtain a remedy in Spain are the estimated probability of success, the estimated time for obtaining an enforceable ruling and the estimated costs to be incurred in the process.
Another factor that is usually taken into consideration by defiant shareholders at the time of filing a lawsuit can be the way other minority shareholders and the market in general see the move. If the move could damage the reputation of the shareholder - in terms of being seen as a reliable investor who has the long-term interest of the company in mind – she or he may consider discarding a lawsuit, particularly if the estimated proceeds from the lawsuit appear to be lower than the reputation costs that may be incurred.